Previous Quarterly Editions
Expropriation Risk: 65 65 65 65 ► Political Violence Risk: 48 48 48 48 ► Terrorism Risk: 32 30 28 28 ► Exchange Transfer and Trade Sanction Risk: 55 55 55 45 ▼ Sovereign Default Risk: 37 37 37 37 ►
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The public appears to have been relatively enthusiastic about celebrations of the 100th anniversary of the founding of the Chinese Communist Party on July 1. This anecdotal evidence corroborates more systematic studies in recent years which suggest that the Party, at least in principle and at the national level, enjoys relatively strong public support and does not rely on repression alone to maintain its rule.
The Party has weathered two recent potential disasters well. The first was record rainfall in central China in July, which led to flash flooding in densely populated areas that caused hundreds of deaths and displaced 1 million people. Local authorities received strong criticism both from citizens and the central government for poor forecasting and a slow response, but there is no sign that the events are in any sense a political turning point.
The second potential disaster was a wave of COVID-19 the same month -- only China's second after the initial outbreak in Wuhan. This second wave did not gain much momentum and was successfully stamped out with mass testing and local social distancing measures. New infections were back to zero in around month.
Both crises ultimately seem to have highlighted the state's competence more than its inadequacies.
In August, the government launched its latest five-year plan for strengthening its already formidable state capacity, which for the first time includes measures for strengthening crisis management -- a response in particular to COVID-19.
The political environment in China has been dominated over the past few months by regulatory and political moves to control the behaviour and influence of large private-sector businesses.
The crackdown on monopolistic practices by 'big tech' that began late last year continues apace and has spread to other targets. The government in July hit the country's CNY100bn (USD15.4bn) private tutoring sector with a raft of measures that limit its growth and its ability to operate commercially. The same month, regulators in Shenzhen cracked down on exploitative practices by residential leasing companies; Beijing municipality followed in August. Tax authorities announced on August 26 a campaign to crack down on high-income and high net-worth individuals, which will include public punishment. Internet companies have begun making billion-dollar donations to philanthropic causes, presumably under direct or indirect political pressure.
These vigorous policies announced in rapid succession have acquired the flavour of a populist campaign to ameliorate resentment over inequality. On August 17, President Xi Jinping appeared to confirm this when he delivered what may turn out to be a landmark speech in which he declared that "common prosperity is the essential requirement of socialism" and said it was necessary to "clean up and adjust excessively high incomes" and "encourage high-income groups and enterprises to return more to the society".
Major foreign firms have so far not been targeted and could escape this particular campaign, as the focus so far has been firmly on domestic inequality and exploitation. Were a nationalistic element to appear in the associated rhetoric, that would be a warning sign.
TREND ►
The Chinese government has not expropriated foreign property overtly since the early Maoist period and shows no inclination to do so. However, on the local level, it is possible that authorities might force a foreign firm to divest at a low price or on unfavourable terms, or effectively force it to remain when it would rather leave.
Much of the apparent risk from expropriation stems from this possibility that China could retaliate against foreign companies as part of a diplomatic dispute (see also “Exchange transfer and trade sanctions risk,” below). The Anti-Foreign-Sanctions Law passed in June explicitly authorises the government to seize real estate and other assets of individuals and organisations that "directly or indirectly participate in the drafting, decision-making, or implementation" of sanctions against China. Beijing's past behaviour suggests it will not use this power readily and may not do so at all. Beijing did not in practice need a legislative basis for asset seizures, but the creation of a legislative basis would make the process more straightforward, so, other things equal, the risk has risen.
There is also the possibility of government pressure on large foreign firms to make philanthropic donations of money or resources, as the domestic internet giants have recently done.
The Chinese Communist Party’s apparatus of political control is the most sophisticated and well-resourced in history. The Leninist political system and the instruments of surveillance, information control, intimidation and state violence that support it make it virtually impossible to mobilise or coordinate any kind of opposition political movement.
Outbreaks of localised violence targeting local officials over specific grievances do occur, but the system is able to crush them before they can gain momentum or link up with people with similar grievances elsewhere. An elite-level coup cannot be ruled out, but there is nothing to suggest this is currently a significant risk. A coup in any case would likely remain ‘within the system’, and perhaps even remain concealed for some time afterwards, rather than a violent conflict playing out in public.
In a country of China’s size, isolated acts of violence by individuals with grudges inevitably sometimes occur and can include bombings. However, the only potential for organised terrorism in pursuit of a political agenda comes from Xinjiang. The government claims terrorists in or from this region have caused more than 400 deaths since 1990. All but a couple of these incidents have been very small and unsophisticated, and none has occurred since 2017, when the government rolled out comprehensive systems of surveillance and social control in Xinjiang.
Beijing has a record of selectively applying regulations to hurt firms from countries whose governments say or do things it objects to. Such undeclared but de facto sanctions have been used against Japan and South Korea, among others, and are currently in force against Australia. Restrictions can affect both imports and exports.
The industries targeted vary but are typically those that hold little importance to China’s economy and significant (if not necessarily overwhelming) importance to the target country. A series of laws and regulations introduced over the last few years -- most importantly the ‘Unreliable Entity List’ -- give Beijing means of imposing sanctions directly and overtly too, though these have so far never been used.
The Anti-Foreign-Sanctions law passed in June authorises the government to apply sanctions in a tit-for-tat manner to foreign individuals and organisations that "directly or indirectly participate in the drafting, decision-making, or implementation" of sanctions against China. Countermeasures may include denial or cancellation of visas, deportation, seizure of real estate and other assets located in mainland China, prohibiting transactions and cooperation with mainland Chinese individuals and entities, and "other necessary measures". The law potentially puts foreign firms in a position of having to choose between violating foreign sanctions on the one hand and risking countersanctions by China on the other.
The central government’s fiscal position is sufficiently strong that there is negligible risk of it being unable to meet its debt obligations. It is possible, however, that a Chinese state organ might, without making it explicit, decide to withhold or block payment to a foreign creditor deliberately, as a means of applying pressure on that firm or its home government for political reasons, most likely as part of a broader suite of measures.
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